Make It Last – Ep 15 – Long-Term Care Insurance Basics
People are living longer, and the cost of long-term care can be astronomical. Every week, Victor is asked about long-term care insurance. This week, we’ll discuss how to buy long-term care insurance, and whether you should get it at all. Plus, the DOL fiduciary rule is under attack. Learn why, and what you can do about it.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
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Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Everybody, welcome back to Make It Last. Thanks so much for joining us this Saturday morning if you’re listening live, which means you’ve got a cup of coffee because it is 7:30 in the morning. Now, not everybody listens to us live, so those of you that are listening to the podcast, you have the luxury of sleeping in, I suppose. [laughs] I don’t know.
There’s an advantage to being the first one to listen to the show because then you can spread the rest of the information to your friends. Anyway, that’s what I tell myself.
We’re going to be back on this show talking about an old topic that is one of my favorites. This week, we’re going to talk about the fiduciary rule. There’s been some updates to that. Then, we’re going to talk about long‑term care insurance, which is a great topic to go over. I tell you, there isn’t a week that goes by that somebody doesn’t ask me about whether or not they should have long‑term care insurance.
Before I get started with this, I just wanted to thank everybody for joining us this week, especially our new listeners, and ask a favor of you. If you like this show, it would be really helpful if you went on to iTunes and left a nice review there and told other people that you liked it or shared the information.
It’s one of the ways that Apple ranks these different podcasts and radio shows that are out there. If they’re reviewed well, then they think, “Maybe somebody else would like it too.” It’d be nice to get up on the ratings and start that climb to being the best radio show for keeping your legal ducks in a row and your financial nest egg secure, if I can get through the tag line anyway.
Before we get to long‑term care insurance, I wanted to cover a little bit about the fiduciary rule. I have probably spent the better part of four or five of the 15 episodes that we’ve done so far touching on the issue of the fiduciary rule. Those of you that get it already are probably tired of me hitting on this topic, but there are some of you that are listening that don’t understand why it’s so gosh darn important to have a fiduciary helping to manage your finances.
We’re going to attack this from a couple of different ways. In the time that I’ve last spoken about the fiduciary rule from the Department of Labor, which was all the way back on June 9th, a month and a half into it, there’s been three pieces of news that directly impact this, and it’s getting such little play out there.
I want to cover the good news first. As many of you know, I am a Certified Financial Planner in addition to being a practicing attorney. When I went out to start my financial services practice, it was very important for me to get what I thought was the best credential to help people with their financial planning.
The CFP designation is something that you get when you pass an exam showing competency in six different areas of financial planning ‑‑ investment, insurance, and they have an estate planning module. I did OK on that one. You pass the test and you show the experience and you agree to some ethical rules that you are going to follow.
Basically, the CFP designation becomes the one that most people are looking for to make sure that they are working with somebody that’s really highly qualified.
The CFP board has taken upon themselves to be leading the financial services industry in what they think are best practices. One of the proposals that is on the table for the membership is to adopt, essentially, a set of ethical rules that require CFPs to be fiduciaries at all times. I pause there because they actually created an acronym of FAAT.
I don’t know if that means that they all want us to be fat, but that FAAT, the Fiduciary At All Times, is essentially an obligation that, no matter what you’re dealing with, whether you’re talking about a qualified account, a non‑qualified account, talking to them on insurance, whatever you’re talking to them about, you wear the hat of a fiduciary, which it is to say that you keep your clients’ best interests ahead of your own. That’s what a fiduciary means.
Now, what I always point out is that it’s staggering to me that this wasn’t the case before, that financial advisors could act in their own best interests. They could sell you something that pays them more and not talk about something that might be better for you because they might not get compensated as well for it.
The Department of Labor rule that went into effect on June 9th only covers retirement assets. It’s only people that are handling retirement money are subject to the DOL rule. As I talked about in the past, all the administration could really deal with was the retirement provisions. This CFP requirement would then cover everything.
Now, I think it’s fantastic, right? I’m behind this. As a lawyer, I am always a fiduciary in someone’s life if I’ve taken them on as a client. I’m always looking out for their best interests. This is no big whoop to me. I’m all for it, but even if they pass the rule, it will only apply to people that have their CFP designation and voluntarily go out and get the designation and be subject to their ethical rules.
Then there’s the whole question about how they’re going to enforce it. At least it’s a step in the right direction because what’s happened since the DOL rules really places in jeopardy the protections that consumers should be getting, and what they may believe they’re actually getting, since all of the news said already that they passed this rule.
Just after they passed the rule, on June 29th, the Department of Labor issued a request for information examining the final fiduciary rule, which gives them an opportunity to review whether or not they should keep it. There is a bit of a threat on the fiduciary rule as the Department of Labor is seeking more information.
In addition to that, we had a representative, and this was ‑‑ let me make sure I get this right here ‑‑ Ann Wagner from…I guess it’s Missouri. Anyway, she introduced a bill that would eliminate the labor department’s fiduciary rule, and then replace it with the best interest standards for brokers giving retail investment advice.
You’re going to get confused and turned around in best interest for broker, in retail, but the point of this is that it would give brokers the opportunity to recommend something that, in fact, may not be in the client’s best interests, that the fiduciary rule would be done away with.
In the bill, in fact, there’s an exemption for the sale of annuities. I’ve talked a lot about annuities and where they fit and where they don’t, but, let me be frank, annuities are one of the most oversold and most poorly sold investments that are out there. This bill would eliminate them from the fiduciary standard altogether, which is just terrible, terrible for consumers.
There is a little bit of a light at the end of the tunnel because there are states that are trying to enact a fiduciary obligation for anyone that is governed by them. Primarily it starts with Nevada, and there may be other states that add to it.
If we’re going to wrap this up, because we got to, we got to get to a break here, what’s happening in the fiduciary space is troubling as to how it sets up to protect consumers.
The rules that are being put in place don’t protect them, and even the stuff that is being promoted and suggested as ways to protect them is limited in its effectiveness because it’s not really about protecting everybody ‑‑ you have to be CFP, you have to be in Nevada. It’s not really what will protect the majority of the consumers.
Victor: What we can go back to is, and I said this before, you should be asking your financial advisor to sign a fiduciary pledge saying that they will act as a fiduciary in all matters. They’ll be FAAT. [laughs] That they will act as a fiduciary at all times. If they’re unwilling to sign that, then walk away.
The horse is dead, I’ve beat it. Let’s take a break. When we come back, I’m going to cover long‑term care insurance. This is a topic that’s big and a lot of people have questions about it. We are going to cover all of that when we come back for the break. This has been Make It Last.
Victor: Hey, everybody. Welcome back to Make It Last. We’d spent that time talking about the DOL fiduciary rule. A lot of that news had come out in the paper, which is how I keep abreast of what’s going out in the world.
Another thing that had come up, which triggered the reason to discuss long‑term care insurance, is there was a report in “New York Times” about a woman who went from middle class to Medicaid. That’s the way they titled it ‑‑ middle class to Medicaid. She had the better part of about $600,000, spent it all in long‑term care, and then applied for Medicaid.
There was a whole article about that, and then it was tying into the most recent Healthcare Reform Bill, which looks to cut out Medicaid. It just got me thinking about long‑term care insurance.
As we try to put together the legal and the financial components of planning for getting older, they need to work together. One of the biggest benefits of an outfit like what I run, which has got the legal and the financial, is that you’re able to coordinate together those two areas so that they work the way they’re supposed to.
In any event, I want to spend some time on long‑term care insurance, because this is a topic that comes up week after week after week. I’m meeting with people, and we’re reviewing their finances. They’re either approaching retirement or they’re in retirement, and they’ll say to me, “Victor, should I have a long‑term care insurance?”
Almost the immediate reaction for me is, “Do you even qualify?” Because, many times, by the time they’re coming to see me, they may be so old that it’s not really an option.
I want to talk a little bit about what long‑term care insurance is, why it exists. Then I want to give you some recommendations for what I think are the best ways of addressing long‑term care insurance, specific products.
Long‑term care insurance. Insurance is in the name, which means, by definition, there are 500 different products and each one them more complicated than the one before. Really figuring out what you need can get difficult.
People who spend their lives as insurance agents ‑‑ and that’s all they do ‑‑ sell long‑term care insurance like it’s a single solution for a single person and everybody should get the same thing over and over again.
What I’ve experienced in my practice has been that not everybody needs long‑term care insurance ‑‑ there are ways of combining legal and financial planning so that your long‑term care concerns are covered ‑‑ and that there are, in fact, some better products than others.
Most of the time, they’re not being sold as the front‑line defense because they take more explanation to get right. Sometimes, it’s just easier to propose to somebody something a little less expensive and just to get a signature on the line.
I want to talk about insurance generally, because you need to understand why the landscape of long‑term care insurance has changed. When we think about insurance, insurance is generally, traditionally been a way of transferring risk.
Anytime you have a risk, you have a few things that you can do with it ‑‑ you can assume the risk, you can avoid the risk and you change your behavior, or you can transfer the risk. Transferring the risk is what insurance companies are all about. In the theory of risk, you transfer risk when the likelihood of it occurring is low, but the economic impact of it is high.
Let’s illustrate this with property and casualty insurance. In the property and casualty insurance, when you get homeowner’s insurance, the reason why you do that is that the chance that your house is going to burn down is low. It is not likely that you’re going to have some form of a catastrophic event on your home requiring a claim. However, if you do need to file that claim, if something happens, the cost of that is really significant.
What would it cost to rebuild your home? Most people don’t have that in savings when it comes, so they insure the risk by transferring it to an insurance company that pools together everyone’s money. It knows it’s not going to pay it out very frequently, but when it does pay it out, none of those members really has the ability to self‑insure against the risk.
Long‑term care insurance is about the same thing. What you’re thinking about is that the likelihood that you’re going to need long‑term care is, if it’s not low, it’s at least indeterminable. We don’t know really whether or not you’re going to be the kind of person that needs long‑term care.
In my seminars, when I talk about long‑term care, I do mention that there’s research out there about how likely it’s going to be that you are going to need long‑term care. The research that I share is that one out of every four men or 25 percent of men will need long‑term care sometimes in their lives. One out of every two women or 50 percent of the women are going to need long‑term care.
The men get happy in my seminars. They smile because they’re less likely to need long‑term care. I stop them dead in their tracks. [laughs] I say, “Gentlemen, the reason why your incidence is so low is because, one, she was taking care of you, and, two, you’re dead, which means that she needs help because she’s got nobody to take care of her.” That’s the reason why it is.
I have people focus not on the percentage chance that they’re going to need long‑term care, but thinking about the percentage difference between 0 and 100, because either they will need long‑term care or they won’t. Either they’re going to need to pay for consistent and persistent long‑term care like home health care or an assisted‑living facility, or they won’t.
When they get that, when they’re going to think about where they’re going to put their chips, they had a roulette table and the choices are black or red. They’re either going to put all their chips on red saying, “I will never get sick,” and then live with the consequence if they do. Or they say, “We’re going to plan for if we get sick,” and then live with the consequences if they don’t.
People trade these things off, because the impact of needing long‑term care is so significant, so significant. If you think about the cost of long‑term care, home health care aides cost about $21 to $23 an hour with a minimum of a three‑hour stay. That’s $75 minimum on a day. Many times, it’s $200‑220 a day from just home‑based care.
When you look an assisted‑living facility, the base level of that is about $5,500, at least in my area. If we think about how much assisted living…By the way, base, that’s room, board, activities, the nice lobby, the shows they put on, and the free popcorn. That’s $5,500.
When you start to need more care ‑‑ like you have a dementia condition and you need a lockdown unit or an adult daycare situation ‑‑ that can rise to $8,500, $9,500. By the time you get to nursing home care, I don’t know, $12,000 a month?
It’s clear that it’s super expensive, so insuring against that risk makes sense if you get the right kind of policy with the right kind of trade‑offs and you’re able to shrink essentially what is your entrance fee to get into there. I’m not talking about premiums. I’m talking about the risk of never needing the policy.
Victor: When we get back, I’m going to go deep into the different kinds of policies that you have available to you, what it takes to qualify, and which ones we recommend. That way, you can examine long‑term care insurance on your own and think about long‑term care planning not just within the context of legal planning but also legal and financial and putting it together as one package.
Stay tuned. We’ll be back right after this break, talking about long‑term care insurance. Thanks.
Victor: Welcome back, everybody. Thanks for staying with us. We’ve been talking about long‑term care insurance. We’re finally going to get to the meat of the show today in talking about what kinds of policies are available, and what you should consider when you think about long‑term care insurance.
Long‑term care insurance basically comes in two different flavors. You can get a premium‑based policy, or you can get an asset‑ or a cash‑based policy. Most of the people who have long‑term care insurance have a premium‑based policy.
The way that that works is that you pay a premium to the insurance company. Just like term insurance, if you stop paying that premium, you have no coverage. That premium continues essentially indefinitely.
They’re allowed to raise the premium rates, based on your participation in a group. We might say, “Every male who is age 78 to 80, we’re going to increase the premiums by 17 percent,” [indecipherable 20:17] do that across the board.
The other thing about a premium‑based policy is that, like a term life insurance, there’s no cash value. What you pay into it is the pure cost of insurance. No other way to say it. You’re giving money to the insurance company. It’s just a straight transaction. There’s nothing you’re getting back out of it. If you don’t need long‑term care anytime in the future, you get nothing back from that policy. You just paid it.
There’s a risk involved with that ‑‑ a financial risk ‑‑ because as you get older, the likelihood of you getting sick increases.
The chances you’re getting long‑term care when you’re 50 and you take out that policy, they’re super low, and so premiums, they just reflect the risk. As you get older and you get a little bit more frail, and the numbers that the insurance company are running suggest that you might get sick in the future, at that point in time, risk goes up, and so the premium goes up.
The risk that I’m talking about is a financial risk because in retirement most people are on fixed incomes. They’re taking social security and the pension. They’re not really getting increases on that that match the increases that the insurance company is trying to charge on it.
What happens? You get older. It gets more expensive. It takes a bigger portion of your fixed income on a monthly basis, and you decide to drop it when you most need it.
I can’t really fault somebody for that because they’re making some very hard choices about, “Do I have enough money for dental insurance or for long‑term care insurance?” or, “To get a new car or to keep my long‑term care insurance?”
Every month or quarter, there’s a decision about whether or not to keep this policy. That’s the premium‑based policy.
On the other side, what we recommend ‑‑ and we find it to be most effective when we need it ‑‑ is an asset‑based policy. An asset‑based policy is essentially one in which you are contributing money that has cash value. The policy is one that exists where, if you need long‑term care insurance, it has a benefit that it will provide, but if you never need long‑term care insurance, there’s also a benefit there.
You might think about it like a life insurance policy, where you’re contributing this money. If you use long‑term care, there’s a big benefit ‑‑ they have increased whatever they’re going to be giving you, you have some leverage on your money. Put $200,000 in, I get $400,000 worth of long‑term care. If you never use the policy and you die, there’s a death benefit. In that death benefit, you pass that money off to your kids.
The way to think about it is that money is not lost, per se. That’s in the form of an asset‑based care.
There are other forms of asset‑based care where there’s no death benefit but where the premiums are set that you are fully paid into the policy, so that no matter what happens in the future ‑‑ you get older, your risk increases ‑‑ you will have a fully paid policy. They can’t increase their premiums. In fact, you don’t have to worry about the premiums because you’ve prepaid all of them.
This is a trade‑off. These kinds of policies are a trade‑off, because you are trading off your ability to make money on your own money. You’re going to carve out a portion of your portfolio. You’re trading that and you’re giving it to the insurance company.
The insurance company is making a deal with you that says, “If you get sick, we will give you more money than you could possibly have created in this time but for long‑term care. If you don’t get sick, we’ll give you a little bit of a return on your investment, but we’re going to keep the bulk of what we were able to generate in terms of growth for that portfolio.”
That’s the trade. The trade is a transfer of that risk over and you’re giving up the ability to make that money. Many of my clients make the decision to give up that because they want to insure in the risk.
If you think about someone’s portfolio, you got a million dollars in there. It’s unlikely that you’re going to spend all million dollars. If you carve out 200 or 250 thousand dollars of that and contribute it to a long‑term care policy, the nice thing about that policy is that if, in fact, you want to cancel it…
Let’s say that in 20 years from now, the government covers everyone’s long‑term care 100 percent. Long‑term care insurance is no longer necessary. Free healthcare for everybody, including long‑term care.
We can go back to the insurance company and say, “Give me that money back.” At the end of the portfolio, when we’re starting to run out of money, and we say, “Jeez, it’d be nice if we had that $250,000 that we gave the insurance company,” they’ll give it back to us.
Now, we would have lost any money that we could have made on that. That’s fine. I understand. But it’s not a lost investment the way the premium‑based is, where all of the money that you’re contributing is essentially gone.
Some of these policies that are the asset‑based kind, the ones that we recommend, they can be with 100 percent return of premium, an 80 percent return of what you contributed. They can configure them all kinds of ways.
My experience has been that this is great peace of mind for my clients because they’re able to ensure that they have a fully paid long‑term care insurance policy that won’t increase in premiums, that can never default or go out of effectiveness, and basically cover that need in the future.
Look, long‑term care insurance is not a panacea for covering long‑term care. It may cover a lot of it, but what we’ve experienced over the history of having these kinds of policies and the increases in the cost of care is that the cost of care increases faster than the value of these policies. Whatever you’re pegging it to today is unlikely to be that number in the future.
It’s hard to really grow it that quickly, because long‑term care insurance is growing faster than any investment I know. [laughs] The cost of long‑term care has increased, I don’t know, 11 percent annually. There isn’t an investment in the world that guarantees that.
We’re having a five‑percent increase on an inflation rider or a three‑percent compounding in the way some of our policies do. That’s helpful, that it will at least try to keep pace, but it’s unlikely that it’s going to keep pace 100 percent.
I look at long‑term care insurance as essentially that way of easing how much of your own money that you’re using, or at least leveraging it. You turn your money into one or two times what it was going in. That just stretches it out.
This needs to be combined with legal planning, because legal planning will be able to secure assets that your long‑term care insurance…It’s going to have some finite value. It will run out at some point in time. We don’t want to be in a position where we threaten the home or other investments because we’ve run out of long‑term care insurance and you’ve just gotten too sick for too long.
Those are the ideas behind long‑term care insurance. If we think about how to cover for it, the plan really needs to be holistic. It needs to cover legal solutions and financial solutions. They need to be working together. You need to know which money is going to be there to protect your IRA versus your brokerage account, which is a big, long pitch for, “You need to be working with an advisor for this stuff.”
It needs to be somebody who’s holistic enough to understand legal and financial planning, be able to provide insurance, be able to provide investment, be able to cover all those things, and ‑‑ going back to the first segments, folks ‑‑ be a fiduciary, put your interests first and not be a product salesperson on what they’re doing.
That’s long‑term care insurance. That’s really what I wanted to cover for here for today. I know there are other areas that may come up from time to time. I might address them ‑‑ specifics on different kinds of policies or situations or how it works with Medicaid.
We haven’t covered everything. We’ve given you an introduction, at least, today on what long‑term care insurance looks like and why you should be thinking about that as part of your overall planning. All right?
That’s it for today. I want to thank everybody for joining us here. I want to thank the production crew for making us sound so good.
Victor: In fact, if you love this show, please, please, please go onto iTunes. Rate it highly so that other people will find it if they do a search for great retirement planning podcasts.
If you have a friend that you know might benefit from this, go ahead and send them the link. Tell them, “Look this up. It’s 30 minutes a week. It’s something that’s going to help you learn more about all of these topics. I think you should listen to it.” That would be a great way of sharing it.
Anyway, we’re going to catch you again next Saturday on Make It Last. I want to thank you for joining us today. This has been Make It Last, where we keep your legal ducks in a row and your financial nest egg secure. Catch you next Saturday.
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